Ex-Trader Admits to Fraud

By

Chad Bray And

Justin Baer

Updated April 3, 2013 8:31 p.m. ET

In late 2007, with a seven-figure bonus and his reputation at Goldman Sachs Group Inc.GS-1.03% on the line, Matthew Taylor placed an $8.3 billion futures bet and hid it from his bosses. Now, he faces a possible long prison sentence.

On Wednesday, Mr. Taylor pleaded guilty to a single count of wire fraud for concealing the trades, which cost Goldman $118.4 million to unwind. He told a federal judge he made the big bets to boost his reputation and bonus at the bank.

ENLARGE

Matthew Taylor, a former Goldman Sachs trader, leaves U.S. court in Manhattan on Wednesday after pleading guilty to wire fraud.
Bloomberg News

"I accumulated this trading position and concealed it for the purpose of augmenting my reputation at Goldman and increasing my performance-based compensation," Mr. Taylor said at a hearing in Manhattan federal court on Wednesday. "I am truly sorry for my actions."

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Prosecutors recommended a sentencing-guidelines range of two years and nine months to three years and five months in prison. The range was based in part on Mr. Taylor's compensation for 2007—$150,000 in salary and an expected $1.6 million bonus—rather than the loss suffered by Goldman.

But the judge in the case sent a signal that the ex-trader might face an even stiffer sentence. U.S. District Judge William Pauley III questioned why prosecutors, in negotiating a plea agreement, didn't seek a longer potential sentence. "He cooked the books," the judge said.

Sentencing is set for July 26.

Wednesday's plea is the latest twist in the case of a young trader whose career went off track in the final days of 2007, just as the securities industry was bracing for the looming crisis.

It also comes as time is running out for prosecutors and regulators to bring actions related to the events that occurred in the months leading up to and during the downturn.

Mr. Taylor attended high school in suburban Boston, where his guidance counselor, Adelaide Greco, remembers him as the class valedictorian once named "most likely to succeed." While enrolled at the Massachusetts Institute of Technology, he returned to his high school to talk to students about achieving one's dreams, Ms. Greco said. "Kids looked up to him," she said.

From MIT, Mr. Taylor headed to Wall Street. He worked for Morgan StanleyMS-1.17% from 2001 until 2005, then landed at Goldman.

By November 2007, Mr. Taylor was an equity-derivatives trader on Goldman's Capital Structure Franchise Trading desk and had lost a "significant portion" of the trading profits he had accumulated earlier that year, according to criminal charging documents filed by prosecutors Wednesday.

Because of his lost profits and the general market conditions, his supervisors ordered him to rein in the risks he was taking. By December, they had told him his annual bonus would decline "significantly," according to the document.

In mid-December, Mr. Taylor ratcheted up the size of his bet on electronic futures contracts tied to the Standard & Poor's 500-Stock Index, accumulating a position with a face value of $8.3 billion.

That figure, court records show, exceeded the risk limits for his entire desk at Goldman, a group of about 10 traders.

At the same time, Mr. Taylor also made false trade entries that appeared to take the opposite side of that bet. The purpose, according to court records: "to conceal and understate the true size" of his long position on so-called S&P 500 E-mini futures.

Goldman fired Mr. Taylor on Dec. 21, 2007, for "alleged conduct related to inappropriately large proprietary futures positions in a firm trading account," the bank wrote in a filing submitted to the Financial Industry Regulatory Authority, which oversees broker-dealers.

Goldman agreed to pay $1.5 million in December to settle civil charges by the CFTC that it failed to supervise Mr. Taylor. The agency also said in its complaint against the bank that it wasn't fully forthcoming with regulators when Mr. Taylor was fired. Goldman settled the charges without admitting or denying wrongdoing.

The bank cooperated in the probe, according to a person familiar with the investigation. "We are very disappointed by Mr. Taylor's unauthorized conduct and betrayal of the firm's trust in him," a Goldman spokeswoman said Wednesday.

The episode didn't bring an immediate end to Mr. Taylor's Wall Street career. In March 2008, he returned to Morgan Stanley as trader in the firm's equities division. He left Morgan Stanley a second time last August, according to Finra.

A person familiar with the matter said Morgan Stanley executives were aware of Goldman's Finra disclosures on Mr. Taylor's termination, but had no reason to suspect the trader had been accused of concealing billions of dollars in positions and misleading his employer.

Mr. Taylor surrendered to Federal Bureau of Investigation in New York about 8:30 a.m. Wednesday. Following the hearing on Wednesday, Mr. Taylor, who lives in Florida, was released on a $750,000 bond.

The CFTC, which regulates futures trading, still has a civil lawsuit pending against Mr. Taylor.

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